Costs due to Retailers

The role of the retailer is to package up wholesale electricity, from the sometimes wildly fluctuating National Electricity Market (NEM); together with distribution charges; the purchase of LGCs and STCs; and their own marketing and management costs. 

They can then ring you up and offer you a deal you can’t refuse.  Or perhaps you pay yet another middleman through a newspaper or TV station to get you a notional discount?  This is a very competitive area of the business. 

There is presently such a deal running; sponsored my two media organisations.  Cynics point out that a similar deal is available by going directly to retailers; and that it is aimed at poorer consumers who may not always pay their account on time; in which case there are penalties that could make the arrangement very profitable to the organiser.

The retailers’ profitability rests on them accurately forecasting an average energy price and getting a good price for distribution services from the national grid and the local distributor.  

In order to reduce the risk retailers may hedge against forward energy price fluctuations.  These uncertainties add an additional cost to their business that gets charged back to customers.

Transparency in these transactions can be further reduced because one of the retailers in a market is usually the local distributor.

When we pay our electricity bill around a tenth pays for administration, retailing, marketing and sending us the bill.  Around 4 cents per kWh goes to buying the fossil fuels.  Another 2 cents goes to the carbon tax. 

But the majority (including 1.2 cents and rising to subsidise the capital cost of renewable energy) goes to servicing capital loans and management, construction, maintenance and depreciation of all the equipment needed at the power-station to convert the fuel to electricity then to transport the electricity via the national and local distribution grids.

Put another way, your bill is due predominantly to the cost of financing, building, maintaining, renewing and managing a lot of capital equipment.  A good deal of this cost is due to dividends and interest to the initial investors and lenders.

I have already mentioned the cost to retailers of purchasing renewable energy credits (LGCs and STCs). 

As in the transmission grid, each link in the local distribution grid must be able to comfortably supply the typical peak current.

Further complexity has been added at a local level since local feed-in from solar panels (or potentially, private wind turbines) has been accommodated.  Additional metering (and billing complexity) adds cost to the local network. 

Rooftop solar often feeds back high priced energy or reduces demand when the price from the NEM is low; for example in the middle of the day rather than at the morning and evening peaks.

Except for the summer peak load, solar feed-in lowers local domestic demand when it is already low.  This makes the grid more, not less, peaky.  It exaggerates the morning and evening peaks relative to average demand.  

The net result is a higher cost or less profit to retailers.  This is passed on in your bill as higher cost per kilowatt hour.

The increasing peakiness in domestic demand has been blamed as a major factor contributing to distribution costs. 

Maximum peak demand now occurs on a few very hot days in summer when air-conditioning is use is at a maximum.   In this case roof top solar is beneficial in lowering peek loads.  But as already indicated this is the most profitable period for generators. 

Although smoothing the peak demand is good for reducing grid costs and losses, it is argued by some that as a result of the MRET transfers to encourage rooftop solar, generators need to increase their bid price at other times to remain profitable; so that it does nothing to lower the averaged retail electricity price.  At the same time the STC’s thus created significantly increase that price.

Smoothing the load

If residences were more sensibly designed and insulated, these fluctuations in current would be less extreme and the grid could be lighter and less expensive.

Off-peak water heating was an early attempt to better spread the domestic load.  It has been suggested that the advent of electric cars could be another ‘water heater on wheels’.  But waiting for midnight or midday to recharge could be a problem if you have run out 20 miles from home in peak-hour traffic.

Batteries, hot salt and pump-storage of water in hydroelectricity schemes have been tried or are used on a small scale in many countries.  In every case the scale is modest. The cost of storing say 5 to 10 thousand gigawatt hours (5-10 TWh) across the NEM is mind-boggling.

‘Smart’ meters are already available in trial areas and can be configured to better reflect the actual NEM price to retailers; so that summer peak air-conditioning could be made to cost say ten times the off-peak rate.   This would quickly justify a wide range of energy saving changes to buildings including double glazing, wall insulation and rooftop solar, for the summer period alone.

Trials are also currently underway using complementary natural gas powered fuel cells, within local distribution networks, to smooth the unevenness of supply from rooftop solar.

In the commercial sector if the actual NEM price was reflected in the retail price, the higher capital cost of off-peak water chilling or freezing and circulation systems, complemented by better building design and insulation, incorporating heat recovery systems, might quickly be justified.

The net cost to all consumers could then be reduced.  But smart meters too cost money and you the consumer will have to pay; one way or another.